Private equity's expansion into fast-growing emerging markets has reshaped the business landscape, and the Middle East and North Africa rode this new wave of investor interest. Annual private equity (PE) investments in the region soared from just $148 million in 2004 to $3.8 billion in 2007 prior to the global recession.

Now, with economic growth reviving, conditions look promising for PE to pick up where it left off. But bucking the global trend, the industry's momentum in the MENA region appears to have stalled. In 2009, total deal value was just $521 million, its lowest level in five years. Signs of inertia elsewhere in the deal pipeline suggest that new investment activity could remain subdued.

A slump in new fundraising is another indicator that momentum has ebbed. New capital commitments to the Middle East dropped from 10 per cent of the total allocated to emerging markets in 2008 to just five per cent, or $1.1 billion, in 2009. Examining a sample of 10 regional funds, Bain & Company found that, on average, they were able to close at only 55 per cent of their original targeted size.

Bain's recent interviews with more than 25 limited partners (LPs) found that they are becoming more selective about the regional funds they work with. For Middle East-focused funds that are unable to demonstrate a consistent track record of success, it is becoming increasingly difficult to attract investors who have many appealing options in other high-growth markets. In a recent ranking of 10 emerging markets, LPs ranked the Middle East only ninth, just ahead of Russia and the former Soviet republics.

Active PE firms across MENA also have their hands full actioning the money they have already raised. Through the end of 2009, less than half of the $20 billion committed since 2001 had been invested. Much of remaining "dry powder" has been idle for so long that many PE funds are now beyond their planned investment windows. Thus, because they cannot count on using capital gains from successful liquidations of earlier PE investments, investors may be unable—or unwilling—to meet future capital calls.

A scarcity of attractive investment opportunities will continue to be a major challenge. Local economies are dominated by family businesses and government-owned enterprises that have long spurned PE acquirers—and in some cases, have become competitors to PE firms.

PE firms can elevate their game and differentiate themselves strategically from their competitors by concentrating on four key areas:

Sharpen their sector focus. Specialisation in growth sectors such as healthcare, education, logistics, and oil and gas will be an increasing source of competitive advantage for sustaining strong deal flow. These industries boast increasing consumer demand and attractive profit margins, and they have proven to be resilient through the downturn.

Broaden the investment landscape. PE firms can significantly expand their deal flow by looking beyond conventional buyouts and growth-capital investments to consider a wider range of opportunities, including infrastructure, real estate, mezzanine lending and other debt financing. Bain & Company estimates the value of infrastructure deals open to PE investors will reach between $6 billion and $10 billion annually.

Enhance due diligence and smarter ownership. PE firms need to hone their due diligence processes—disciplines that are especially important in the MENA region, where a high proportion of potential target companies are private and lacking in transparency. Once they close on a deal, PE firms need to work actively with management at their portfolio companies to identify two or three high-priority initiatives that create value.

Lay the path for exits. Developing a sound exit strategy is particularly important for foreign PE firms operating in markets like Saudi Arabia, where IPOs are restricted to local investors, the secondary market is thin, and taxes on capital gains can be onerous.

Despite recent headwinds, the region's vast wealth and solid growth offer a lot to attract PE interest. But it will take greater focus from PE firms to convert those appealing attributes into winning returns.

Jochen Duelli is a partner with Bain & Company and a leader of its Middle East Private Equity practice.